CoxFDIChina - Foreign Direct Investment and the Peoples...

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Foreign Direct Investment and the People’s Republic of China: Further Burgeoning Prospects Seth Cox Economics 508 Winter 2005 3 March 2005
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Cox 2 I. Introduction A. FDI and Development Investment in developing economies giving rise to foreign control of domestic economic resources in the context of the modern political-economic landscape can and quite often does represent far more than the sheer capital offering. Foreign direct investment (FDI) is an, but not the sole, engine of modernization and economic development ultimately improving living standards. Exemplary of this phenomenon are the economies of East Asia, often coined the newly-industrialized countries, to which foreign investment contributed significantly. The economic development of China will be examined, relevant to patterns of direct foreign investment and the peculiar policy environment. China has quite evidently utilized FDI as a modernizing force with much success in the reform era, becoming the world’s leading recipient of FDI in 2002. 1 Despite such success, it is equally evident that the People’s Republic of China (PRC) can do much to inflate the force of FDI in their economy. As a developing economy in the international arena, the PRC lag far behind their brethren in terms of FDI per capita. 2 As such, the prospects for increasing the quantity and quality of FDI inflows are deserving of attention as well. B. FDI: Defined and Generalizations To begin a discussion of FDI, it would be quite instrumental to initially define and appreciate the term. As earlier hinted, foreign investment can best be defined as direct when said investment gives rise to foreign control of domestic economic assets. 3 Stated more eloquently by the IMF, FDI “is made to acquire a lasting interest in an enterprise operating in an economy, other than that of the investor, the investor’s purpose being to have an effective voice in the management of the enterprise.” 4 Thusly, FDI is in excess of a threshold determining the amount invested equates to an “effective voice” in the firm’s management, control beyond that of the mere portfolio investor, authority 1 “Attracting Investment to China.” (2003). OECD Policy Brief, Sept. 2003, http://www.oecd.org 2 “Attracting Investment to China” 3 Huang, Yasheng. 1999. “Why is There So Much Demand for Foreign Equity Capital in Asia: An Institutional and Policy Perspective,” Weatherhead Center for International Affairs work. paper March 1999, http://www.ciaonet.ord/wps/huy01/huy01.html. 4 Huang 2
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Cox 3 determining the firm’s actions as a corporate entity. However, this threshold is not determined by normative standards, such as those espoused by international economic institutions, but rather by positive sovereign imposition. Foreign investment is differentiated between direct and indirect forms relative the amount invested and the net ‘worth,’ or assets withholding debt of a particular firm. The level in the US, the proclaimed economic hegemon, for foreign investment to be categorized as direct is ten percent the net worth of the firm.
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